What are the strategic shifts that could drive the evolution of the payments industry?

This year’s annual EBADay conference in Dublin highlighted a turning point in the dialogue between banks and fintechs. Janet Du Chenne reports

Banks are now more accustomed to partnerships and over the last six months there has been an acceleration of smarter collaboration whereby both parties are coming together to collectively understand the customer problem in order to innovate, noted David Watson, Deutsche Bank’s Chief Digital Officer and Head of Corporate Cash Management Americas. Further momentum will rely on a digital and cultural change. Flow reports from the conference on several strategic shifts that will shape the payments industry.

Digital and cultural change

In this new era of collaboration, banks are continually developing new products and services to maintain pace with their clients’ expectations. But digital and cultural change among industry leaders could ease the next raft of technological breakthroughs. While competition will not fully relinquish, unleashing the potential of various technologies will rest upon banks collaborating not only among themselves – but with technology providers and industry bodies. In Watson’s view, the optimal conditions for advancement come when a consortium of industry leaders unite to solve a common problem together. The opportunity may lie at the front-end of the customer’s business. Banks and fintechs should collectively focus on the point where the money is transferred or where the payment comes from instead of just dealing with it once it comes in. They have an opportunity to collectively “bake” payments processes into the front end of customers’ businesses, said Watson.

Financial technology companies will have a role to play in offering new products and services. Through open API, they will be able to access banks’ services. At the same time, new technologies could elevate the role of banks as trusted holders of digital identities which may solve KYC issues.

PSD2 will catalyse a more open and digital payments market

With the January 2018 deadline for the initial phase of the EU Payments Services Directive (PSD2) fast approaching, banks’ readiness for the incoming market updates has become an area of vital importance. But the real opportunity should come in the second phase, from 2019 on-wards, when Third Party Providers (TPP) should be included in the payments ecosystem. Third party access to account introduces new services that can be offered by banks and allows fintechs to provide a new digital channel to access bank customers’ payment accounts. This simpler interaction of banks and fintechs should drive competition and innovation in an open payments market.

The regulation is a game-changer, noted Christian Schaefer, Head of Payments, Corporate Cash Management at Deutsche Bank. Open banking will enable banks and fintechs to provide new digital services to payment account customers and access new client groups by interfacing with fintechs. PSD2 also provides banks with access to a wide number of applications and open platforms so that third party apps can work on them. Fintechs can place those APIs on top of banks’ platforms to enable their clients to be PSD2 compliant.

In order to make these opportunities a reality, Schaefer called upon the market to work together more closely. This, he says, will be crucial for creating the industry standards that will usher in this new era of innovation. In this respect, Schaefer believes that for banks to make the most of PSD2, the work begins now – but will continue well beyond the PSD2’s deadline. This should require their products and services to be API-enabled to other services. They should be required to open up their infrastructure to other banks and TPPs to enable create more products and services in recognising revenue opportunities.

In a heightened risk and compliance environment, regulators are imposing anti financial crime (AFC) and anti-money laundering (AML) regulations on correspondent banks. Banks are continually revisiting their business models and it has become clear that they have reached a crossroads when it comes to correspondent banking. A halfway approach, where banks see the practice as an add-on service has become increasingly risky. The industry needs a radical transformation, noted Mark Recker, Head of Market Management, Institutional Cash Management at Deutsche Bank. Banks must provide a fully proofed correspondent banking offer by increasing control levels, and a fully articulated risk appetite statement to clients. A combination of this and continual investment in new technologies and real time payments should encourage radical transformation in the sector.

In light of the digital economy, as client’s expectations evolve, banks should leverage the power of big data, as well as adopting the correct organizational spirit, when transmitting cross border payments. Data will also help in identifying client needs. Banks should start working with the data they sit on to predict changing client behaviours and implement the tools in the right way. In Recker’s view, leveraging the power of big data, as well as adopting the correct organisational spirit – one that actively engages in further collaboration – will be crucial in ensuring that the necessary improvements can be achieved.

‘License to operate’ will depend on AFC/AML

Digitalisation in transaction banking has moved from meaning near-perfect straight through processes (STP) rates to much more. It means collecting and leveraging client data to monitor activity, enhancing client offerings, assessing financial risk, as well as conducting KYC and AML processes successfully. AFC/AML should call into focus the relationship banks want to maintain with their end customer as the trusted holders of their money. Banks should use digital to meet the evolving regulatory demands and engage customers, said Christian Westerhaus, Head of Product & Strategy, Institutional Cash Management at Deutsche Bank. They should do more to understand the full cycle of their clients’ businesses. By doing so they should understand which products may serve their clients better and help with their own financial risk. This means digital data about client balances, client activity, financial risk and non-financial risk relating to KYC and AML. It’s not only about new technologies but about the way we manage data and how our organisation and our processes combine with data in new initiatives like the SWIFT gpi, said Westerhaus.

Evolving banks and fintechs partnerships

Banks have opened up more, creating easier access for start-ups and fintechs to engage with them. Successful partnerships will require fintechs with well-defined business models and banks with buy-in from the business and a firm-wide committed and sponsorship of the implementation timelines.

A panel on the future of partnerships noted that while fintechs have different needs and different interactional models, they have to be solving something real for clients. Not only should they have a good business model but the foresight to move the bank’s business model forward too. These partnerships will rely on sponsorship from the business and not just the innovation teams in banks.

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